Question

How does contribution margin differ from gross margin? VIRUS How will net income under variable costing compare to net income under absorption costing in the following three situations? Explain briefly the cause of any differences. (a) Units produced equal units sold (b) Units produced exceed units sold (c) Units produced are less than units sold

Answer 1

	ABC Company
Q 4)	Net Operating Income under Absorption Costing
	Sales Units	13000
	Sales Price	$         20,80,000.00
	Cost of goods sold =Sales Units*$142.62	$         18,54,060.00
	Gross Margin	$            2,25,940.00
	ABC Company
	Net income under variable costing
	Units Sales	13000
	Sales Price	$         20,80,000.00
	Variable cost
	Variable cost of goods sold(1006400+482800+241400)	$         17,30,600.00
	Variable Selling Expense	$            2,93,300.00
	Total Variable Expenses	$         20,23,900.00
	Contribution=(Sales-Variable Expenses)	$               56,100.00
5a	Units Produced=Units Sold
	Under both absorption costing and under variable cost Same amount of net operating income.
	Example:
	Net income under variable costing
	Units Sales	50000
	sales	$            9,50,000.00
	Variable cost
	Variable cost of goods sold	$            1,70,000.00
	Variable Selling & Administrative Expenses	$            1,50,000.00
	Total Variable Expenses	$            3,20,000.00
	Contribution=(Sales-Variable Expenses)	$            6,30,000.00
	Fixed Cost
	Less: Fixed production cost	$            5,40,000.00
	Less: Fixed Selling & administrative expenses	$               60,000.00
	Net Operative Income	$               30,000.00
	Net Operating Income under Absorption Costing
	Sales	$            9,50,000.00
	Cost of goods sold ($170000+$540000)	$            7,10,000.00
	Gross Margin(Sales-Cost of goods sold)=($950000-$710000)	$            2,40,000.00
	Selling & Administrative Expenses	$            2,10,000.00
	Net Operating Income($240000-$210000)	$               30,000.00
5b)	If production exceeds units sold than
	Net operating income under absorption costing is greater than the net income under variable costing, because fixed cost used under clsoing inventory os deferred.
	Example:
	Net income under variable costing
	Production(Units)	3000
	sales(Units)	2700
	Selling price per unit	$                     385.00
	Variable cost per unit	$                     273.00
	Fixed Production cost	$            1,56,000.00
	Fixed selling & administrative expenses	$               88,000.00
	Selling Price	$         10,39,500.00
	Variable cost	$            7,37,100.00
	Contribution	$            3,02,400.00
	Less: Fixed production cost	$            1,56,000.00
	Less: Fixed Selling & administrative expenses	$               88,000.00
	Net Operative Income	$               58,400.00
	Units in Beginning Inventory	0
	Units Produced during the year	3000
	Units sold during the year	2700
	Closing Inventory	300
	Net income under Absorption costing
	Production	3000
	Sales	2700
	Unit Selling Price	$                     385.00
	Variable Manufacturing Overhead	$                     266.00
	Fixed Manufacturing Overhead	$                        52.00
	Cost of goods sold	$                     318.00
	Gross Margin=Sales-Cost of goods sold	$                        67.00
	Total Gross Margin In year 1(2700*$67) in year 2(300*$67+2400*$59)	$            1,80,900.00
	Variable Selling Expenses	$               18,900.00
	Fixed selling & Administrative Expenses	$               88,000.00
	Net Operating Income	$               74,000.00
	Difference arises in Variable and Absorption Costing Method due to fixed Manufacturing Overhead cost deferred in Inventory
	Year
	Variable Costing Net Operating Profit	$               58,400.00
	Add: Fixed Manufacturing Overhead cost deferred in Inventory	$               15,600.00
	Less: Fixed Manufacturing Overhead in Beginning Inventory
	Net Operating Income under Absorption costing	$               74,000.00
5c )	If units produced is less then the units sold
	Net Operating income under Variable costing> Net operating income under absorption costing because Fixed cost used under closing inventory of last year has been reversed.
	Example:
	Net income under variable costing
	Production(Units)	2600
	sales(Units)	2700
	Selling price per unit	$                     385.00
	Variable cost per unit	$                     273.00
	Fixed Production cost	$            1,56,000.00
	Fixed selling & administrative expenses	$               88,000.00
	Selling Price	$         10,39,500.00
	Variable cost	$            7,37,100.00
	Contribution	$            3,02,400.00
	Less: Fixed production cost	$            1,56,000.00
	Less: Fixed Selling & administrative expenses	$               88,000.00
	Net Operative Income	$               58,400.00
	Units in Beginning Inventory	300
	Units Produced during the year	2600
	Units sold during the year	2700
	Closing Inventory	200
	Net income under Absorption costing
	Production	2600
	Sales	2700
	Unit Selling Price	$                     385.00
	Variable Manufacturing Overhead	$                     266.00
	Fixed Manufacturing Overhead	$                        60.00
	Cost of goods sold	$                     326.00
	Gross Margin=Sales-Cost of goods sold	$                        59.00
	Total Gross Margin In year 1(2700*$67) in year 2(300*$67+2400*$59)	$            1,61,700.00
	Variable Selling Expenses	$               18,900.00
	Fixed selling & Administrative Expenses	$               88,000.00
	Net Operating Income	$               54,800.00
	Difference arises in Variable and Absorption Costing Method due to fixed Manufacturing Overhead cost deferred in Inventory
	Year	Year 2
	Variable Costing Net Operating Profit	$               58,400.00
	Add: Fixed Manufacturing Overhead cost deferred in Inventory	$               12,000.00
	Less: Fixed Manufacturing Overhead in Beginning Inventory	$             (15,600.00)
	Net Operating Income under Absorption costing	$               54,800.00